Welcome to the Latest news from Basel IV: Challenges and Implications: Part One Blog Last modified 2017-05-08
The Financial crisis of 2008 is still casting its shadows and Basel III has not yet been phased in, but we are hearing a lot of talk about Basel IV so what is it and how will it differ? The BIS: Bank For International Settlements is promoting global monetary and financial stability through international cooperation.
They issue many complex formulae for calculating capital requirements and capital adequacy ratios. Regulatory capital as the nominator and risk weighted assets as the denominator. Basel III was mostly focused on the nominator.
Basel III focused on the definition of capital instruments, the introduction of new deduction positions and changes to the ratios, Liquidity Coverage Ratios and Leverage Ratios. Basel IV is not an official Accord as such but more of a colloquial term for the recent regulatory publications and issues.
Basel IV is focused on the methods of calculation of Risk Weighted Assets, for all types of risk.. credit Risk, Market Risk and Operational Risk. The approach Standardised or Internal Rating Based Approaches do not matter, they will all be changed.
For example when we refer to credit risk we have the standardised approach which is now on its second consultation paper, and the internal ratings based approach has just one consultation paper but we can expect significantly more changes to come.
Some areas of risk such as Market Risk and the Fundamental Review of the Trading Book are already finalised since January 2006 however and we are not expecting many changes there.
When we talk about Credit risk and securitisation or the SACCR the new calculation for the measurement of exposures. So there are different degrees of finalisation depending on the topic and so we can expect different documents to come into force on different dates accordingly.
The status as regards operational risk we have seen two consultation papers, and we have seen quite significant changes from the first to the second.
The upshot is this will effect banks and some more so than others, new banking models are seeing a separation and utilitising or comoditising of back office infrastructure such as obtaining bank licensing from the more glamorous Fintech origination and securitisation of consumer loans primarily targeted at the Millenuim mobile marketplace...
There are of course several models that can be formed and may indeed morph and most move faster than the regulators.
Regulation is therefore attempting to cast a wider net, or what I would call distributed trip wires to prevent circumvention of the rules. It is therefore impossible to really answer this question. It makes more sense to understand the major goal of the of the Basel Committee for Banking Supervision was to make all of the approaches more risk sensitive.
Thus banks which engage in higher risk portfolios such as the subprime loan market will face higher capital charges, hopefully squeezing out the insidious markets in debt trafficking. Banks with low risk portfolios could in fact profit from the new regulations but more on this in part two of this post.
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Latest news from Basel IV: Challenges and Implications - 28th october 2016
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